Opportunity in The ‘Bad’ Parts of Town

As investors, we are always on the lookout for the best deal. Each investor has to determine his or her investment criteria based on their style. Regardless of your individual investing temperament, houses in the ‘bad’ part of town may be worth a second look.

RealtyTrac recently published a study a report that analyzed the “best of the worst” neighborhoods across the country. Surprisingly, our beloved Columbus Ohio’s’ 43206 zip code was ranked 19th on the list.

While this zip code does include some of the city’s most prestigious and edgy-cool real estate, really the article is referencing the largely forgotten corridor that did not benefit from the same gentrification  that caused property values to rise.

Based on the article’s title, we conclude that the other best-of-the-worst neighborhoods are also down and out places that locals typically overlook.

The reality is that low-income areas are ripe with opportunity if one is looking through the correct lens.

To be honest, our experiences in these types of neighborhoods have not come without their own set of drama, but overall any headaches have been well worth the returns, both financially and socially for the neighborhood.

These neighborhoods are worth a second look because:

Low Property Acquisition Prices

Because demand is low for homes in the area, prices reflect the lack of interest. The low entry pricing is an opportunity to acquire property at prices that are below the cost to build. Whenever you can buy an asset less than its intrinsic value, it is worth considering.

Strong community

In Columbus, as is likely the case with other cities on the list, the zip code referenced in the article is predominantly an African-American community. Often, the family structure centers on a matriarch that serves as the hub of activity and fellowship for the family.  

These neighborhoods are full of elderly ladies who have provided good, stable lives for their children and grandchildren. Now they provide the critical social glue that holds the community together. Extended family members often come by for a visit and/or desire to live nearby.

Investing in a neighborhood with strong family values and a built-in collection of “grandma’s” provides stability in both the community and investment returns.

Quality Housing Stock

Despite low sales prices, the 43206 zip code is full of quality housing. Many of the homes in this area were built-in the 1920s-1950s when construction practices were more robust than they are today. Hardwood floors, intricate built-ins, pocket doors and ornate fireplaces are all commonplace in this area of the city.

Obviously we haven’t toured each of the neighborhoods highlighted, but we suspect that the same holds true in other cities.

The irony of it all is that people in high-end areas often have to shell out thousands of dollars in search of old world charm, while low-income residents in these neighborhoods enjoy these amenities every day!

Stable After Repair Values

For some people this is blasphemy! The fact that home prices in the area have not really risen over the last few decades can be seen as a negative for the untrained eye.

Actually, this is one of the most positive aspects of the this type of neighborhood. Think about it, if you can consistently acquire assets for less than they are worth, strategically extract the value out of them and liquidate them at their full market value, you have a recipe for wealth.

Stable/predictable crime

Let’s be honest, crime comes with the territory in the neighborhoods we are talking about. And probably more crime than most of us would care to deal with. Nevertheless, the crime that occurs in this area is typically contained to gang bangers and the drug scene.

These neighborhoods are filled with many well-intentioned, working class residents that want a safe, clean, affordable place to raise their family. They may stunt every once in a while, but don’t be fooled.

We never hear about the community gardens or after school programs intended to foster entrepreneurship on the evening news.

These areas have a lot to offer and a wealth of good people who mean well. Let’s not be fooled, crime does exist, but in all likelihood it will not cross the path of an innocent resident.

Opportunity Exists in Fragmented Markets

Any value investor will say that fragmented markets are where the most opportunity lies. The same is true for investment housing.

In the context of a neighborhood, fragmentation most readily presents itself in the mix of ownership. Ideally, neighborhoods with a reasonable vacancy rate as well as a mix of homeowners and renters are most desirable.

Columbus’ east 43206 fits this investment criteria precisely. According to the RealtyTrac study, 19.4% of homes in the zip code are underwater. This means that they owner owes more on the home than it’s worth. This corresponds quote well with the National Association of Realtors estimate that there was a 19.6% vacancy rate in 43206 in 2014.

The high volume of vacant property allows investors and would-be homeowners to acquire the property for less money that would be required in other markets. The opportunity is ripe!

Just a thought…investing in depressed neighborhoods is the ultimate social impact investing. Social impact investing is the concept that a company or investment should offer a double or triple bottom line. That is, in addition to the return on investment, the investment should also provide a positive impact on a community or address a systemic need.

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